What is customer churn?
Customer churn, or logo churn, is the measure of how many of your customers are no longer paying for your product within a specific period. It is normally measured on a monthly basis in most SaaS companies. However it can be measured annually, or whichever time period suits your needs.
It represents the rate of customer disengagement from your product or service. This results in a decline in the customer base, which is why it is also known as customer attrition. This disengagement can occur for various reasons, ranging from dissatisfaction with the product or service, unmet expectations, pricing concerns, or simply a shift to a competitor’s offering.
Understanding the concept of customer churn is critical if you are going to maintain a sustainable business. Retaining customers is vital for the long-term success and growth of your product, and your business as a whole.
Customer churn not only loses you the revenue you would have earned from the departing customers. It also encompasses the loss of potential future revenue, as acquiring new customers is generally harder than retaining existing ones.
Customer satisfaction and loyalty are integral to a company’s success, so understanding the nuances of customer churn is highly important. It will help to ensure you retain your users, and that they remain happy with your product or service.
How do you calculate customer churn?
Accurate and regular calculation of customer churn is crucial for product managers. You need to assess the impact of your customer retention efforts, and to make informed decisions to reduce churn and improve customer loyalty.
Customer churn is usually represented as a rate in the form of a percentage. While you can say that you ‘churned 13 customers this month’, when it comes to monitoring ongoing performance metrics it’s most common to track the churn rate.
Calculating your customer churn rate is fairly simple. The formula is:
For example, if you have 100 customers and you’ve lost 5 of them in a month, you would calculate it as 100 divided by 5, then multiply that by 100. Therefore the churn rate in this situation is 5%.
Once you’re tracking your churn rate with this metric, you can strategically allocate your resources. This enables you to develop targeted retention strategies and enhance your overall customer experience.
There are other churn-related metrics that you can track. These are focused on the revenue loss related to churning customers, which is fittingly known as ‘revenue churn’. For more information on these metrics and other vital product management KPIs you should be aware of, download our free eBook, The Complete List of Product Management KPIs.
Why do you need to keep track of customer churn?
Understanding why you should be staying on top of customer churn is crucial for any product manager.
Loss of revenue
Customer churn directly affects your revenue. When you lose customers, your business loses the recurring revenue that they would have generated. A high churn rate can result in a decline in your overall income This in turn will make it challenging to sustain or grow your business.
Cost of acquiring new customers
Acquiring new customers is often more expensive and difficult than holding on to existing ones. When churn is high, you will end up spending a significant slice of your marketing and sales budget on replacing those lost customers.
For businesses to remain viable and grow, they must continually replenish their customer base. However, without dealing with churn, this growth can be unsustainable, leading to a risky reliance on a never-ending stream of new customers.
You also run the risk of the well running dry, as the number of potential new customers might be outstripped by the number of customers that are churning.
Damage to your reputation
A high churn rate can also damage your reputation. Unhappy customers are more likely to share negative experiences than happy ones. This can and will impact how much your leads will trust you, and their willingness to engage with your brand.
Loss of market share
In competitive markets, customer churn can lead to a loss of market share. If your competitors are better at keeping their customers, they can capture a larger portion of the market. They might even poach your leaving customers, putting your business on the back foot.
Why do customers churn?
Customer churn can be classified into two categories:
- Voluntary churn, where customers actively decide to terminate their relationship with a company.
- Involuntary churn, where customers leave due to external factors, such as relocation, death, or changes in financial situations.
To an extent, it’s possible to plan for voluntary churn, and indeed to put into place procedures to reduce it. Unfortunately, involuntary churn is not something that you can control or effectively plan for. However, accounting for it is still important.
Here are some most important and common factors contributing to customer churn:
- Product or service dissatisfaction: Customers may find that the product doesn’t meet their needs, lacks desired features, or fails to live up to expectations. This can result from issues with product quality, performance, or reliability.
- Pricing concerns: Customers may be price-sensitive. If they think that the cost of a product or service outweighs its benefits, they may seek cheaper options. Frequent price increases or hidden fees can also trigger churn.
- Competition: If you are in a competitive field, when a better or more innovative alternative becomes available your customers may switch to a competitor’s product or service.
- Poor customer service: Inadequate customer support, long response times, unhelpful representatives, or difficulty solving issues can lead to frustration and ultimately customer churn. High-quality customer service is often as critical as your product or service itself.
- Unaddressed complaints: Customer feedback and complaints should not be ignored. If customers voice concerns, and these concerns go unaddressed or unresolved, they may lose faith in the business’s ability to meet their needs, prompting them to leave.
- Lack of engagement: If customers don’t see value in the product or service and are not engaged with it, they are more likely to churn. A lack of onboarding processes, user education, or personalization can contribute to this issue.
- Technical issues: Customers can churn if they’re dealing with constant technical issues or glitches with a product or service. For example, if your service has regular and unpredictable downtime, your users are likely to switch to a more stable alternative.
- Ineffective onboarding: A poor onboarding experience can set the wrong tone for a customer’s relationship with a product. Customers who struggle to understand or use a product may become frustrated and churn early in their lifecycle.
- Changing needs or priorities: Over time, customers’ needs and priorities can and will evolve. If your product or service doesn’t adapt to these changing requirements, your customers may find themselves outgrowing it and seek alternatives that better align with their current situation.
- Life events: In some cases, customers churn due to life events such as relocation, financial hardship, or changing personal circumstances. These are examples of involuntary churn, and while they may not be preventable, it’s still important to account for them.
Understanding the specific reasons for churn within your customer base requires data analysis and gathering customer feedback. Implementing customer surveys, monitoring customer support interactions, and analyzing customer behavior can provide valuable insights.
Once you identify the root causes of churn, you can tailor strategies to address these issues, ultimately reducing customer attrition and fostering greater loyalty with your user base.
Who is responsible for customer churn?
When it comes to it, the main burden of actually tracking and managing customer churn usually falls on the shoulders of the customer success team.
However, customer churn is a complex phenomenon that is influenced by various factors, both internal and external to the business. While product managers often play a critical role in addressing product-related issues that contribute to churn, managing customer churn requires a collective effort from multiple teams within an organization.
Here’s a closer look at the key stakeholders and their role in managing customer churn:
Product managers are responsible for the overall success and performance of the product. They play a central role in understanding customer needs and preferences, ensuring that the product meets these requirements, and continuously improving the product to enhance customer satisfaction and retention.
Customer success teams focus on ensuring that customers achieve their desired outcomes with the product. By proactively engaging with customers, understanding their goals, and helping them derive maximum value from the product, customer success teams can foster long-term customer relationships and minimize churn.
Customer support teams are at the forefront of addressing customer concerns and resolving issues. Timely and effective resolution of customer queries, complaints, and technical problems can significantly influence customer satisfaction and loyalty, thereby reducing churn.
Marketing teams are responsible for creating awareness, promoting the product, and maintaining customer engagement. By ensuring that marketing communications align with customer expectations and accurately represent the product’s value proposition, marketing teams can contribute to reducing churn.
Sales teams are often the first point of contact for potential customers. It’s crucial for them to understand customer needs and expectations accurately. By setting realistic expectations and ensuring that the product aligns with these expectations, sales teams can help prevent churn resulting from your product not fitting their needs.
Leadership and management
Leadership and management play a crucial role in fostering a customer-centric culture within the organization. By setting clear goals, providing adequate resources, and prioritizing customer satisfaction, leaders can establish a strong foundation for minimizing churn and driving sustainable growth.
Ultimately, reducing customer churn requires cross-functional collaboration. Teams must work together to identify customer pain points, develop comprehensive solutions, and implement strategies that enhance the overall customer experience.
Each team’s contribution to reducing churn is interconnected and dependent on the others. Effective communication, collaboration, and a shared commitment to customer satisfaction are essential for minimizing churn and fostering long-term customer loyalty.
By recognizing the shared responsibility for customer churn and fostering a culture of customer-centricity, you can build stronger relationships with your customers and create a more resilient and sustainable business model.
How to reduce customer churn as a product manager
Stay on top of the causes of churn
The most important step you as a product manager can take to reduce your customer churn rate is to understand why your customers are leaving you.
To this end, you need to be performing exit interviews with churning customers. Gathering their feedback will provide you with insights on how you can avoid losing more customers for the same reasons.
From here, you can determine if their issue is something that you can fix, if it’s caused by a misunderstanding, or if it’s due to their expectations not being aligned with the service you provide.
Resolve customer issues at the source
If the issue is internal, such as poor performance or missing functionality compared to a competitor, add the problem to your roadmap and start working on ways to solve it.
Communicate that you are aware of the problem and that you are taking steps to resolve it. This could possibly persuade customers who are on the fence about staying with you to give you a chance to provide their wanted fix.
If the issue is down to a misunderstanding, then correct that misunderstanding there and then if possible. This might even stop the customer from churning at all. It also could be an indication that you need to take a look at the effectiveness of your onboarding process. You may also want to consider the support and guidance you are providing for your users.
Manage customer expectations
If the issue is down to misaligned expectations, then you need to make sure that you are targeting the correct ideal customer profile (ICP). Ensure that Sales and Marketing are directing their efforts at the right audience.
You can do this by assessing those that are still with you, and finding out what value you provide them that makes them stick around. You can then use these insights to inform your messaging in the future. This will help ensure the next customers you bring in are looking for what you are offering.
Ask them questions like: “What problem were you looking to solve?” or “How did you solve it before this?” or “How did it feel when you did solve it with our product here?”
Understand what their pain point was and how they talk about your product as the solution for it. You can then use that language to reposition your product so you can attract more customers who are a fit for your service.